Bloomberg Tax
Sept. 6, 2023, 3:02 PM UTCUpdated: Sept. 6, 2023, 5:53 PM UTC

Long-Awaited Bitcoin Accounting Rules to Capture Rises, Dips (2)

Nicola M. White
Nicola M. White
Reporter

Crypto companies and other businesses with significant holdings of digital currencies will get long-awaited accounting rules to measure the value of the Bitcoin, Ethereum, and other crypto in their coffers, US accounting standard-setters unanimously voted Wednesday.

Under new rules expected to be published by year end, companies that hold or invest in cryptocurrency will be required to report their holdings at fair value, a measurement that aims to capture the most up-to-date value of an asset—including rebounds in value after prices dip. While the new standard will inject volatility into the earnings of companies that are heavily invested in crypto, the ability to record recoveries will be an improvement over the current practice, companies and accountants have told the Financial Accounting Standards Board for months.

“It’s not very often that we can both take cost out of the system and improve the decision usefulness of information, and it makes it a really easy vote to do both of those,” FASB member Christine Botosan said.

The rules will go into effect as soon as 2025, but companies will have the option to apply them early, FASB agreed.

“It’s a great step forward for the entire crypto market. I think it’s a great step toward mainstream adoption,” said Jeff Rundlet, head of accounting strategy at accounting software company Cryptio. “I can see finalizing this proposal to help large corporations that are maybe scared to hold crypto on their balance sheet because they’re scared of the technical complexities.”

Rulebook Gaps

No part of the rulebook for US accounting specifically addresses how companies like enterprise software maker MicroStrategy Inc., automaker Tesla Inc., or crypto exchange Coinbase Global Inc. should recognize and measure the digital currencies they own.

Companies currently default to an American Institute of CPAs practice guide that treats most cryptocurrency as an intangible asset, a category that includes things like trademarks, copyrights, and brands—all items that, unlike crypto, are rarely traded. This means companies record their crypto at the historical price they paid and assess their holdings every quarter for impairments, or value declines. If the price of Bitcoin drops even briefly during the period, it’s considered impaired. Companies can’t revise values upward if the market recovers.

This accounting method routinely dings the earnings of MicroStrategy, the largest public company holder of crypto.

Fair-value crypto reporting “would enable us to provide investors with a more relevant view of our financial position and the economic value of our bitcoin holdings, which in turn would facilitate the ability of investors to make informed investment and capital allocation decisions,” MicroStrategy CFO Andrew Kang wrote to FASB in May, responding to the board’s original proposal.

The accounting rules will be mandatory for all companies—public and private—for fiscal years beginning after Dec. 15, 2024, including interim periods within those years. This means 2025 adoption for calendar year-end companies. Companies will be allowed to adopt the rules once FASB formally publishes them later this year.

Companies are already required to present intangible assets as a line item in their balance sheets. Under the new rules, companies will have to make a separate entry for their crypto assets so investors and other readers of financial statements get a clear picture of how much a company is invested in crypto.

In addition, they will disclose in their footnotes every reporting period significant holdings of crypto and any restrictions on those holdings. On an annual basis, they will have to reconcile—or disclose changes in the opening and closing balances of—their crypto assets, broken out by category. They will not need to include within the reconciliation activity information about crypto assets received as payments and immediately converted to cash, FASB agreed Wednesday.

In addition, since crypto will be measured at fair value, companies will be subject to the disclosures required in the appliacable accounting rules, ASC 820, so financial statement readers know how companies came up with their measurements, FASB agreed.

Long Journey

FASB has rejected three separate requests since 2017 to write rules for crypto, reasoning that too few companies use Bitcoin in a material way. The board changed its tune once major companies like Tesla and MicroStrategy started investing in the blockchain-traded asset.

The board kept its focus narrow, covering assets that are created or reside on distributed ledgers based on blockchain technology and are secured through cryptography. The crypto assets have to be currently classified as intangible assets, as defined by US accounting rules, and fungible, meaning they can be interchanged with assets of the same type.

Non-fungible tokens, or NFTs—unique digital tokens that can be anything from video clips to digital sports trading cards—won’t be covered by the rules. Stablecoins and wrapped tokens—digital tokens that allow crypto from one blockchain to be used on another—also aren’t covered.

Several groups, including all four Big Four accounting firms, pressed FASB to include wrapped tokens in the final plan, saying they are held for similar purposes and trade at prices similar to the underlying crypto assets.

The majority of board members on Wednesday said they needed more information about the market before expanding the scope of the board’s work, and rejected calls to include wrapped tokens.

“Intentionally keeping this project narrow has really allowed us to get this information in the hands of investors sooner,” FASB member Susan Cosper said.

FASB has said it will continue monitoring the crypto market and take additional action if necessary.

“This won’t and shouldn’t be the last crypto project; there should be more to follow,” said Aaron Jacob, vice president of enterprise accounting at software company TaxBit. “This is the right first step.”

To contact the reporter on this story: Nicola M. White in Washington at nwhite@bloombergtax.com

To contact the editors responsible for this story: Jeff Harrington at jharrington@bloombergindustry.com; Kathy Larsen at klarsen@bloombergtax.com

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